Original Author: Dong Jing
Original Source: Wall Street Insights
The severe volatility in South Korea's domestic stock market is driving large numbers of retail investors toward the US market—but the bet they are placing remains on the same AI theme.
According to data from Korea Securities Depository, South Korean investors net purchased approximately $4.5 billion worth of US stocks in July, a significant increase from June and nearing the peak level of $5 billion seen in January this year. Meanwhile, data from the Korea Exchange shows that for most of last week, South Korean retail investors continued to be net sellers of domestic stocks, even as the benchmark index entered a technical bull market, while foreign investors reversed to net buyers.
The most notable operation in this capital outflow is: South Korean investors spent about $840 million buying American Depositary Receipts (ADRs) of SK Hynix, even though they could have directly purchased shares of the same company domestically. At the same time, the triple-leveraged semiconductor ETF SOXL topped the list of US stocks most favored by South Korean investors in July, with leveraged products occupying four spots among the top ten net purchase targets for the month.
Analysts warn that South Korean retail investors' strategy of "changing the venue but not the bet" not only fails to effectively diversify risk, but also, the ADR premium and the prevalence of leveraged products are typical signs of speculative overheating, potentially creating greater volatility in localized markets.
Buying ADRs: A 10% Premium Still Sparks Frenzy, Experts Call It 'Insane'
Of the $4.5 billion in US stocks net purchased by South Korean investors in July, approximately $840 million flowed into SK Hynix's ADRs, making it the second-largest US security net purchase target for South Korean investors.
This behavior has puzzled market observers. Owen Lamont, Senior Vice President at Acadian Asset Management, pointed out that SK Hynix ADRs recently traded at a premium of about 10% compared to their Korean-listed shares and exhibited higher volatility. Lamont said:
"This is absolutely insane. There's no reason for Korean investors to buy ADRs of Korean stocks."
Lamont stated that such price dislocation is unusual and often serves as a warning sign of speculative overheating. "This is a symptom of a bubble," he said, likening this phenomenon to similar dislocations seen in ADRs of Indian companies during the dot-com bubble era.
Leveraged Bets: Triple ETFs Lead the Pack, High-Risk Products Clustered
While South Korean investors are pouring into US stocks, their preference for high-leverage products is equally noteworthy.
According to Korea Securities Depository data, among the top ten net purchase targets of US stocks in July, four were leveraged products. The Direxion Daily Semiconductor Bull 3X Shares ETF topped the list—this product aims to track three times the daily gains and losses of a semiconductor index. The ProShares UltraPro QQQ and ProShares Ultra QQQ ranked fourth and sixth, respectively.
So far this month, the ProShares Ultra QQQ ETF also entered the top ten most popular US stocks for South Korean investors, ranking seventh.
Despite the capital flow from Seoul to Wall Street, several analysts note that the core logic of South Korean retail investors hasn't changed.
Phillip Wool, Head of Research at Rayliant Global Advisors, said:
"Ironically, if you break down the data and look at what they're buying, you'll find that most of it is still stocks tied to the AI hardware theme—which is precisely the sector that recently plummeted in the domestic market."
Jung In Yun, Founder of Fibonacci Asset Management, believes that some traders who suffered losses in South Korean semiconductor stocks or leveraged ETFs are now turning to what they perceive as higher-quality, more liquid US AI stocks.
"They aren't necessarily reducing their exposure to the AI theme; they might just be changing the geographical vehicle to express the same view."
Local Distortion Risk Greater Than Systemic Impact
Will the influx of South Korean capital cause a substantial impact on the US market? Analysts have differing views, but overall believe systemic risk is limited.
Wool sees little risk. He pointed out that retail investors can exert disproportionate influence in the South Korean market, but the US market is dominated by professional institutions. Even sizable inflows from South Korea are insignificant compared to the overall trading volume.
Lamont is more concerned about the risk of distortion at the local level. He noted that South Korean investors had previously flocked to US "quantum concept stocks" in late 2024, warning that the widespread proliferation of leveraged ETFs in South Korea, Hong Kong, and the US "might be exacerbating volatility and amplifying market swings."
The departure of South Korean retail investors has profound roots in their domestic market.
Previously, a strong rally attracted a large number of retail investors into semiconductor stocks and leveraged products, followed by a sharp market correction. According to Korea Financial Investment Association data, the margin balance in the South Korean stock market was about KRW 37 trillion (approximately $26 billion) at the end of June, then plunged to KRW 27 trillion earlier this month, hitting a new low for the year.
Lamont stated that while the scale of US stock purchases in July was "strong," it was not unprecedented. "But what's interesting is that they increased their buying of US stocks even as the South Korean market crashed."
